Offset Mortgage?

diver69

Looking for some general advice on how best to fund a house extension.

Estimate 60 - 70K for extension work.

Currently mortgage free and have been for in excess of 10 years (we bought young), approx 60K in easily accessed savings (we've never got around to putting the money somewhere useful) and could access savings currently held in kids names.

Due to changing career because of redundancy a couple of years ago monthly income reduced, but still getting by, also wife's job not 100% secure. Generally we are risk averse to financial things and don't have any debt.

We are both rapidly aproaching 50 and will have access to DB pensions at 60 from previous careers, although we will still possibly both continue to work for a couple more years.

Initial thoughts are getting an offset mortgage and as long as the savings match the mortgage there seems to be little cost. If possible we might pay off some of capital as we go. This would give the security of still having our savings to fall back on should they be needed.

Are we thinking along the right lines? House is worth circa 230K and improvements put it into the 300K bracket.

Any thoughts most welcome.

dimbo61

Well I Love offset mortgages and the ability to dip into the offset savings when we need too.
Unless you get a fee free tracker deal you will have some costs with having a mortgage.

diver69

Somemore offset questions.

Apart from the benefit that I'd be paying off my capital if I had a repayment offset, I would like the option to minimise the monthly cost of repayments. So am I restricting myself to only looking at Offset Interest Only (reduced choice) or could I get a repayment over 25-30 years (I'm 48) to keep repayment costs down. Over the term of the mortgage I would possibly hope to make lump sum payments.

As I'm typing I've just had a thought.....:idea:

Could an offset mortgage (with a matched savings/current account) be started where the savings match the debt and the interest payment would therefore be nil each month.....but the monthly repayment portion due, could be taken from the savings. Obviously over the course of the mortgage the savings would reduce, as would the debt thus keeping interest charges as nil. I would anticipate a reduction in the need to access these savings would occur over time as pension lump sum/income from previous employment become available at 60, (I'll still be working).

In any event my savings need to pay for the house extension but am I correct in thinking this scenario means I've got access to them should I need them.

WestonDave

In answer to your "thought" - in theory yes but in my experience with First Direct I'm not sure you'd need to do that.


To explain the First Direct system (other banks may work differently so I can only comment on FD), their offset mortgages are interest only, and draw down on demand.


So using your scenario, I would set up three accounts with them. Firstly a mortgage account with a £60k limit, secondly a savings account which is set up to be offset against the mortgage, and then thirdly a further savings account which is not offset.


Day 1 you'd put your £60k savings in the non offset account so it earns interest (there is a variation on this where you only put part of it in there and the rest in a better interest earning account). You wouldn't at this stage have drawn anything on the mortgage because the builders haven't sent you any bills yet, so the other two accounts retain a zero or nominal £1 balance (might be necessary just to keep them open).


End of the month the builder sends you a bill for £10k as the first instalment on the building costs so you draw £10k from the mortgage account to pay him, and at that point transfer £10k savings from the non offset account to the offset account to balance the mortgage and keep interest at zero. Because there is no interest arising on the mortgage account there is no requirement to make any repayment of the mortgage (you only have to pay off the interest to stop it rising over the £60k limit - you can choose any amount higher than that if you want).


This process continues until you have got £60k outstanding on the mortgage, £60k offset savings and £1 nominal in the non offset savings account. If this remains stable then there is no requirement to pay interest, and no need for any further transactions. Any further money you have spare can be added to the non offset savings account to build up a nest egg so that in time you can just transfer the £60k to the mortgage from the offset account and clear both (i.e. after the redemption penalty period).


Provided you can do easy transfers the non offset account could be somewhere else entirely that offers better interest. You just need to be able to get funds from there to the offset account instantly to avoid interest.


Obviously you can cut yourself some further slack by keeping the mortgage balance at say £59k within a £60k limit so if a transfer is late, some interest being applied doesn't push you over the limit.

getmore4less

Offsets you can fund the payments from the offset pot if the lender wants the capital debt reducing(repayment)

The net cost to income, is zero if 100% offset and can stay zero if you fund the interest from the offset pot but the pot runs out quicker than the debt reduces.

diver69

Thanks WestonDave & getmore4less.
Unfortunately the FirstDirect isn't an option as their income requirements are higher than mine.
The general concept sounds fine though, just a case of finding a lender who can accommodate it, ideally without too much admin each month. I'm also guessing that where possible a low/free fee product would be one to look for as the interest rate is arguably irrelevant (unless saving don't match mortgage).
Yorkshire Building Society seems a possibility.

dimbo61

YBS also do friends and family offset accounts !!